Nykaa's pink sale fails to lift the blues

A Nykaa store in New Delhi, India, Photographer: Anindito Mukherjee/Bloomberg (Bloomberg)
A Nykaa store in New Delhi, India, Photographer: Anindito Mukherjee/Bloomberg (Bloomberg)

Summary

Despite the Pink Love Sale in February, orders in the beauty and personal care segment fell by 7.4% in the March quarter compared to a 4% drop in the same quarter last year

FSN E-Commerce Ventures Ltd, the parent company of Nykaa, has some bright spots in its March quarter results. Consolidated Ebitda margin rose 147 basis points (bps) year-on-year and nearly 9bps sequentially to 5.4%. This is the first time in the March quarter where Nykaa’s Ebitda margin has risen sequentially post a seasonally-best December quarter, said JM Financial Institutional Securities analysts in a 25 May report.

In the March quarter, Nykaa benefited from factors such as moderation in fulfilment costs. In its mainstay beauty and personal care (BPC) segment, fulfilment cost fell to 86 per order, a multi-quarter low. This was driven by an increase in regional coverage of warehouses.

Nykaa data
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Nykaa data

It is encouraging that Nykaa sees further tools for margin improvement. In its earnings call, the company said it is looking to control all items of costs. It expects marketing costs to fall as new customer to repeat customer ratio improves. Nykaa has seen this trend play out in beauty business where 78% of gross merchandise value (GMV) is from existing customers. In fashion segment, a relatively newer vertical, the ratio of new to repeat customers is at 50:50. Scale up of eB2B business--SuperStore by Nykaa--would also aid in margin growth.

Moreover, in FY23, employee costs rose due to investments in new initiatives. The company expects this expense head to decline in FY24.

But it is worth noting that the demand environment hasn’t seen a significant uptick and that is a cause of worry. Nykaa’s consolidated GMV has increased year-on-year, but growth pace has slowed in the past two quarters.

Sure, the March quarter is seasonally weak and this means sequential drop in key operating metrics such as the number of orders. But the fall in the last quarter is higher than that seen in the March 2022 quarter.

For perspective, BPC orders fell by 7.4% last quarter compared to a 4% drop in the March 2022 quarter. Note that this is despite Nykaa coming up with a Pink Love Sale in February. Also, annual unique transacting customers saw an addition of 0.4 million last quarter versus 0.5 million in same period last year. While Nykaa’s management has reiterated the minimal impact of macro environment on its premium customer base, analysts at JM Financial believe the pressure on discretionary spends in Q4FY23 did finally impact Nykaa’s BPC segment. Muted discretionary demand also impacted the fashion segment where orders fell by nearly 18% sequentially.

However, Nykaa’s management emphasized profitable growth and that augurs well. “The focus on a mix of profitability and stable growth over superlative growth is evident," said analysts at Nuvama Research.

To be sure, Nykaa’s fashion and other businesses continue to be in the red. Other segments include NykaaMan, SuperStore by Nykaa, international brands, Little Black Book and Nudge. These segments were funded by cash flows from the BPC business.

Analysts at Kotak Institutional Equities expect this to be the case in FY24 too. The broking firm expects the fashion business to take more time to achieve Ebitda break-even.

Stemming losses in fashion and other businesses would improve overall margin performance and boost investor sentiments for the stock, which has halved from its 52-week high of 257.17 apiece in June. A turnaround in demand and hence growth is also crucial. As inflation concerns abate, demand would see an uptick, as per the company. But intensifying competition in BPC and fashion could play spoilsport and investors should watch out for that.

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